The Myth of Consumer Protection Through Disclosure

Omri Ben-Shahar is the Frank and Bernice J. Greenberg Professor of Law at the University of Chicago.

I will focus my blog post on one of the proposals for reducing interchange fees: the requirement that the fees be disclosed to consumers. I am not sure how seriously this option is taken by the GAO report. Indeed, the report concedes that mandated disclosures in this context are not very likely to be effective, because “consumers are likely to disregard this kind of information.” But I will not be surprised if, of all the regulatory options discussed in the report, in the end it will be the disclosure rule that is enacted.

I am sure that readers of this blog don’t need a long explanation why disclosures would be futile in this area. Numerous studies have documented the failure of mandated disclosures in other areas of consumer credit, ranging from TILA, through other financial accounts such as depository, savings, and mutual funds, and extending to disclosure by financial brokers, investment advisers, credit reporting agencies, and even pawnshops. These mandated disclosure rules fail to inform people, to improve their decisions, or to change the behavior of the financial institutions. The fail because ordinary people can read them, can’t understand them even in the most simple format, don’t know what to do with the information even it were understood, and face way too many such disclosures in their every day lives

I recently conducted a study looking at the entire body of mandated disclosure statutes that people encounter, reaching beyond financial transactions. (You can view a talk based on the study here). Mandated disclosures are a routine regulatory device found in insurance law, health care, informed consent doctrine, Miranda warnings, IRBs, and hundreds of product- and service-specific enactments. My study concluded that none of these disclosures do anything to help people, and many of them backfire. One of the features that runs through all these scattered disclosure statutes is how easy it is politically to enact them. When lawmakers respond to a particular problem that requires intervention—much like the one we are now discussing, interchange fees—there is often debate what rules would work, how deep the intervention ought to be, and whose interests to prioritize. But there is very little debate or opposition to disclosure mandates. Everybody supports them. The perception is that more information is always better: it helps people improve their decisions, it “bolsters their autonomy” as some like to put it, and it perfects market competition. At worse, disclosure believers think, the information will not help much, but it surely will not do any harm, and disclosure regulation involves very little budgetary allocation.

Here is a case in point. Just last month, the Federal Reserve regulated overdraft fees. After much thought and consultation, the Fed found a solution to the problem of high overdraft fees for ATM and debit card transactions. Recognizing that many consumers would prefer that money withdrawal would be declined rather than pay a sizeable overdraft fee, the rule enacted by the FED prohibits banks from charging overdraft fees unless consumers opt in to the overdraft fee option. Sounds sensible: give people choice, and set the default rule to induce information dissemination.

But here is the catch. How, according to the legislation, would consumers learn about the size of the overdraft fees and choose, if they care, to opt in? By establishing mandated disclosure requirements! That is, to make sure that the notice is “meaningful”, the Fed, with the support of consumer advocates, mandated a new form—which they call a “segregated disclosure”—a separate sheet consumers will receive from the bank providing them “a meaningful way to consent and thus to providing meaningful choice.” The ingenious advance here, which ensures “informed choice,” is to have a separate form, with a separate notice, and a separate signature. This, supposedly, will prevent “inadvertent” consent.

Like any other technical financial disclosure, this format is unlikely to help, especially the least sophisticated consumers—those most likely to carry overdrafts. Whether it is one form of separate forms, one notice or separate notices, one signature or separate signatures, this will not change the ineffectiveness of this disclosure paradigm. Consumers will get yet another pre-printed boilerplate page, with another dotted line at the bottom, which they will happily not read.

The point is that, when all is said and done, nothing much happened. There was a moment of significant public and media attention to the problem of overdraft fees, but in the end they were not regulated. Another meaningless disclosure was added to people’s lives, already swamped with hundreds and thousands of disclosures. Politically, the Fed finished its job and the problem is now “solved.” This is a familiar pattern: a disclosure rule provides an excuse to refrain from a real solution.

Now back to interchange fees. The GAO report lists several possible policy options, from direct regulation of the fees to restrictions on the terms imposed by issuers and how they are negotiated. These are controversial options that would likely lead to substantial political wrestling. There is also much uncertainty, even among the most sophisticated of academic experts, as to the effects of these measures. Perhaps other entries to this blog will shed more clarity as to the right regulatory direction. But as long as these difficulties remain, and as long as interest groups exert pressure on lawmakers, disclosure rules will once again surface as a safe, unopposed, but unfortunately useless regulatory device.

5 responses to The Myth of Consumer Protection Through Disclosure

Omri is surely spot on when he suggests that disclosure here is not a useful solution.

He is perhaps a little too skeptical of the general possibilities of useful disclosure regulation. Bill Sage has an excellent piece about disclosure in the health-care context, in which he suggests that the value of disclosure regimes depends on the existence of sophisticated intermediaries that will use the disclosed information. Parallel to that reasoning, I recommended a rule (more or less adopted in the CARDS Act) that required issuers to post their cardholder agreements online. This did not rest on the premise that cardholders would compare the agreements, but on the premise that consumer advocates interested in the topic would scrutinize the agreements and bring attention to provisions sufficiently onerous that they would not bear public scrutiny. So I think disclosure regulation can help consumers some of the time, though I agree with Omri that this is probably not one of them.

Its unclear to me whether Allan is saying that there is evidence that banks are preventing merchants from telling consumers about interchange fees. It is my understanding that, quite the contrary, the banks publish the relevant fees. So I’m not sure if rules prohibiting mandatory non-disclosure are a solution in need of a problem? Is there evidence that this is a widespread problem or was that a hypothetical?

More generally, I’m in agreement that the disclosure aspects here seem most likely to raise the costs of compliance without any real, tangible benefits from a consumer protection perspective. And, as Omri notes, they could make things worse depending on their precise form.

It is tempting to think that informing consumers can only improve matters. Moreover, if banks are actively trying to stop merchants from disclosing interchange fees, all the more reason to insist that disclosures need to be made and even mandated. Unfortunately, this is not going to help much. Consumers simply do not know how to process all this information. It is not just because of long gibberish boilerplate-style language. Even simple disclosures, like APRs, are unhelpful to consumers who are bombarded at every turn with numerous disclosures about matters that only cause them anxiety.

I mentioned in my main post my concern that, despite the growing recognition that disclosure is futile and sometimes counterproductive, it is likely to be the only politically feasible regulation (as it has been in hundreds of other cases). Having now read Josh Wright’s post, which refers to the recent House hearing on the proposed interchange fee act, I am afraid that this is closer to a reality. Here is what Rep. Shuster had to say in introducing the act:

“This legislation focuses heavily on transparency … . It makes Interchange Fees subject to full disclosure and terms and conditions set by credit card companies easily accessible by consumers.”

Consumer disclosure requirements certainly have a long and varied track record. On the one hand, economists like full information, and it’s hard to argue against giving consumers more information. On the other hand, if everything is important, then nothing is important. There is a common joke about getting a user agreement that is 100 pages long in 24 point bolded, underlined type.

Generally, I think the Federal Trade Commission is pretty good at enforcing existing consumer protection requirements. Trying to come up with detailed, specific disclosures always runs the risk of imposing ongoing costs while being made irrelevant by rapidly changing events. Having said that, to the extent that bank or network rules prevent merchants from telling consumers about interchange fees, that raises some concerns. Presumably, if a merchant wishes to tell consumers something, the merchant regards it as important and thinks that the consumer will act upon it. To that extent, regulatory intervention to prevent mandatory nondisclosure may be helpful.

This issue is closely tied to surcharging, which a few posters have alluded to, but which appears to be up for more detailed discussion tomorrow.